Everything you need to know about FHFA’s low-income refinance option
There’s good news coming out of Washington this year: A new financial assistance program could potentially save you hundreds of dollars on your mortgage payments each month.* The Federal Housing Finance Agency (FHFA) recently announced the rollout of a refinance program with flexible or low-income requirements. In the coming months, you could have more refi options at your fingertips, helping you reduce your housing costs moving forward.
With interest rates near historic lows, now is the perfect time for homeowners to consider refinancing their mortgages. And thanks to the FHFA’s program, many more people will have the opportunity to take advantage of these cost-saving opportunities, regardless of their financial circumstances.
Let’s dig into the new refi program: how it works, who qualifies and what it means for you and your family.
FHFA’s new refinance option: An overview
Everyone wants to save money on their mortgage, and through this program, the FHFA is making it easier for homeowners with enterprise-backed mortgages to reduce their monthly payments. These refi options only apply to mortgages backed by Freddie Mac and Fannie Mae, which the FHFA supervises. The hope is that by removing the barrier to entry and expanding refinance opportunities to more people, more families can take advantage of current interest rates.
The refinance option is the latest in a series of moves from the FHFA designed to help struggling households manage their housing costs and hang on to their homes. For more evidence of the FHFA’s current philosophy, look no further than last year’s moratorium on foreclosures and evictions for enterprise-backed properties.
What really makes this program stand out is that the FHFA guarantees that eligible participants will save money on their mortgage payments. To that end, the agency’s official announcement includes several requirements that lenders must meet:
- Provide at least $50 in savings each month on mortgage payments.
- Reduce a borrower’s interest rate by 50 basis points, if not more. That means the interest rate could drop from, say, 4.5% to 4% or 4% to 3.5%.
- Pay up to $500 to cover the cost of an appraisal if the borrower is unable to get an appraisal waiver.
- Waive the adverse market refinance fee for borrowers who have loan balances at or below $300,000.
Even the minimum possible return on this refi program would add up to some pretty significant savings over the life of a lengthy home loan, such as a 30-year fixed-rate mortgage.** Needless to say, this is a big step forward as far as leveling the refinance playing field goes.
Ready to launch: Refi program rollout details
Freddie Mac and Fannie Mae are handling rollout a little bit differently from one another, with each enterprise launching its own dedicated refinance option. Fannie Mae will hit the market first, releasing its RefiNow program to borrowers on June 5, 2021.
If your mortgage is backed by Freddie Mac, then you’ll have to wait a little bit longer to take advantage of the program. The enterprise’s Refi Possible option won’t be available until August 2021. Still, given the fact that the FHFA only just announced these refinance options in April 2021, that’s an extraordinarily short release window for a government program.
How much money can you save with these refinance options?
Every case will be different, so it’s hard to say definitively how much you stand to save. That being said, the FHFA itself estimates that, on average, borrowers will be able to cut anywhere from $100 to $250 from their monthly mortgage payments. Even at the low end of that estimate, you’re looking at a pretty big chunk of change when stretched over the course of, say, a 15-year fixed-rate mortgage. Saving $100 each month would add up to $18,000 during the life of that home loan. Just think what you could do with that amount of money back in your pocket!
Let’s take the minimum guaranteed savings as outlined by the FHFA as another example — with a little help from our mortgage refinance calculator. Say you bought your home with a $250,000 mortgage 10 years ago when interest rates were around 4.5%. If you were to refinance your interest rate on that 30-year loan using the bare minimum standards — a 50-basis point reduction — you’d be looking at a 4% mortgage rate. That may not sound like much at first, but your monthly payment would have dropped from $632 to $518. Even better, you would save $10,350 by the time you finished paying off your mortgage.***
Keep in mind these are low-end figures. Depending on your specific situation and the terms offered by your lender, you could potentially reduce your housing costs by much more.
How do you qualify for FHFA refinancing?
As noted, the goal here is to make refinance options more widely available, so many borrowers with a variety of qualification levels could still find a refinance option with this program. These are the guidelines you need to meet to qualify for the FHFA’s program:
- Your income is at or below 80% of the area median income.
- Your FICO credit score is above 620.
- Your loan-to-value (LTV) ratio is higher than 97%.
- Your debt-to-income (DTI) ratio is lower than 65%.
- You have stayed current on your mortgage payments over the past 6 months.
- You have missed no more than a single payment in the past 12 months.
- You own and occupy a single-family home with an enterprise-backed mortgage.
Given that criteria, it’s clear that this program is intended to help those borrowers who could use the most help and may not have taken advantage of today's low rates.
The FHFA announced in April 2021 that both Freddie Mac and Fannie would launch new refinance options for their borrowers. The roll out for these offerings will happen over the summer, giving low-to-moderate income households new opportunities to refinance their mortgages and save on housing costs.
With interest rates continuing to sit at historically low levels, it’s great to hear that the federal government is working hard to provide refinancing options to as many people as possible. Even more encouraging is the news that the FHFA has written certain cost-saving guarantees into the program’s guidelines.
Refinancing your mortgage could potentially save you money over the life of your home loan, but it’s not a decision to make lightly. Speak with a qualified loan expert to understand every refinance option at your disposal and decide which one is right for you.
*Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors.
**To understand the terms of repayment and review representative examples please review the information at rate.com/marketingdisclaimers.
***Sample scenarios provided for illustration purposes only and are not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Guaranteed Rate, Inc. cannot predict where rates will be in the future.